How to negotiate successfully
In business, almost everything is negotiable. The key to successful negotiating, however, is figuring out when to spend time and energy negotiating and how to maximize your negotiations.
In the business of e-commerce, your biggest expense is typically COGS (cost of goods sold). And as your business grows, your COGS grows proportionally. So, savings that you can make across the board in this area will become more impactful the larger your business becomes.
Methods of Payment
This is the easiest way to save on your inventory and it’s a win-win for both you and the vendor. If the vendor will take credit cards, get a cash back card (such as the American Express Plum Card or a Chase Ink Card). These cards provide 1.0% to 1.5% cash back provided that you pay your statement on time. If you spend $100,000 on inventory on one of those cards, you’ve just saved $1000. Spend a million, and that’s $10,000 back in your pocket that goes straight to your bottom line without having to do any negotiating whatsoever. It’s easy money.
If your vendor doesn’t accept credit cards, I suggest offering to pay by check and splitting the difference on the credit card fees. Most vendors don’t want you to pay by credit card because they get hit with 2.5%-3.5% in fees (just like we do!). Offer to pay by check in exchange for a 1.5% discount. They should jump at the opportunity especially on larger purchases.
Always ask for a discount
“What kind of a discount can I get on this?” should be your opening negotiating phrase. In my experience, it works about 50% of the time. And half the time that it works, your vendor will give you a larger discount than you were expecting.
With new vendors, I suggest taking their first offer despite the fact that no one ever opens with their best offer. The reason is that you’ll be able to get larger discounts down the road. You’re trying to build a relationship and in order to do that, you have to create trust when it comes to price.
Oftentimes, vendors are concerned that you’re either going to a) tell their other customers what discount you’re getting or b) undercut the retail price. Both of these situations will cause endless trouble for your vendor. Give them a reason to continue giving you better prices by a) keeping your mouth shut and b) using their discount to make more money per sale instead of competing solely on price against your competitors.
Only negotiate with decision makers
Never waste your time asking for a discount from someone who doesn’t have the authority to give you a lower price.
Negotiate from a position of strength
In business, you must always operate from a position of strength. Remember, you’re the customer. You have the money. However, that doesn’t mean you’ll always have success by simply demanding a discount.
Oftentimes, you must create a narrative to earn the discount. You must highlight the unique strengths of your company and how they will make that vendor more money!
Bottom line: All of your vendor’s customers have money. Why should you get a discount that their other customer’s aren’t? Discover the answer to that question and you’ll be swimming in discounts.
Here is an example from my business: We take all of our own photographs. Oftentimes, these photos are better than the manufacturer’s photos. We’ll let them use the photos in their promotional material in exchange for discounts.
You may not be able to offer a photography trade-out for discounts. But are you a large player in your niche? If so, you may be able to offer unique marketing opportunities for your vendors. Do you have a blog, email newsletter, or Facebook page? Offer to highlight a particular vendor’s product in one of your marketing vehicles in exchange for a discount.
Discounts can come in other forms
Product trade-outs are typically the best way to earn discounts from your vendors because it’s a massive win for both parties.
Let’s say you want to purchase 100 units of a product that costs you $10 per unit and that you resell each unit for $20. That’s a $1000 order and you want a 10% discount ($100 off the wholesale price). If you ask for a straight 10% discount from your vendor, you probably won’t get it. But even if you did, you’ve just left $100 on the table that your vendor would be begging to give you.
Instead of a straight discount, ask for 10 free units which will actually net you $200 when sold. Because the vendor’s cost is probably only $2-$3 per unit, they’re only giving up $20 to $30 instead of $100.
Use payment terms for better discounts
Many of your vendor’s other customers require terms. Agree to pay in advance and in full in exchange for discounts. There’s nothing that a vendor likes better than being paid up front. Because most of us deal with credit card purchases online, we’ve become accustomed to (and oftentime take for granted) the fact that we are always paid prior to shipping.
Your vendors waste a ton of time collecting from their customers. Take that burden off their hands by paying up front and they should reward you with a discount.
Standing discounts are your friend! After you’ve created a positive, long-term relationship with your vendors, you should aim for a standing discount. This is a discount you receive on every order regardless of its size. This should be negotiated based upon the entire value that you bring to their products.
Most retailers purchase 6 months ahead of time for holidays. Thus, the largest gift shows occur in the summer for the Christmas season. Most vendors offer specials at these shows. Even if you can’t make it to the shows, you should still get those discounts! Just ask!
Christmas Order Discounts
The biggest purchases of the year occur for the holiday season. This is your best opportunity for earning year-round discounts and the earlier you start in the year, the better! These negotiations can take a few weeks, so you don’t want the calendar working in your vendor’s favor.
Our typical process is to continue asking for discounts until we receive significant push-back from the vendor. At that point, we move on to asking for other concessions. For instance, if we’ve gotten to a 15% discount and they won’t move any further, we’ll suggest that our other vendors are offering better deals and that we’re not sure we’ll be able to give their product as much promotional effort this year unless we get a larger discount. Obviously, we have to give our most prominent website real estate to the products that offer us the greatest profit margin.
We’ll suggest discounts such as free shipping, net 60 payment terms (in addition to using our credit card), and that we’d like to see the 15% discount become permanent going forward. We’ll also ask if they can throw in a few cases for free if they can’t go beyond their 15% discount. You probably won’t get everything you ask for, but it’s always a good idea to move on to other concessions once you’ve exhausted the percentage-off discount.
Negotiations are personal. So make them as personal as possible!
When negotiating, you must learn as much as you can about the vendor’s business and their motivations.
For instance, If your purchases account for a paltry 1% of the vendor’s business, you won’t be able to sway them toward a discount based upon your volume. You’ll have to find other ways to bring value to them. Research and study their business to figure out how to approach them in terms of discounts. In certain situations, you will have no negotiating power. Move on to another vendor until you have such strength.
You must research your vendors carefully. You must talk to them (and if possible, visit their headquarters) and determine what kind of people they are. What are their concerns? Can you be a sounding board for their new product ideas? Be open to sharing sales data with them on their products or other products that you carry that are similar to theirs. This is extremely valuable information (that would cost them a fortune to obtain) that will help you build rapport. This will lead to discounts down the road.
For example, when our vendors introduce a new product, I’m more than willing to let them know exactly how many people have visited the product page. I’ll also tell them the conversion rate of that page. If I’ve felt that the product is great, but the CR should be higher, I’ll run an A/B price test (at my own expense regarding my margins). Imagine how grateful they are when I discover a more profitable price point!
By studying your vendors, you can determine what is important to them. You can then create value for them and be repaid in the form of discounts. Are they a newer company that is worried about cash flow? If so, offer to pay up front in exchange for a discount. Is this a new product line? Be the first to sell it and give it prominent exposure on your website in exchange for a discount.
Bottom line: You must be creative in your negotiations. Your creativity will be sparked by experience, study, and personal relationships.
Rich Spaulding says:
I really like your point about negotiations being personal. Business is all about personal relationships. When dealing with a supplier, my best successes have come from working an established relationship that I've built up over years of working together. When negotiating, I only want to deal with the person I have spent a lot of time with in the past. It's to my advantage to use that "built up" relationship. I talk more about that in this article: